Wednesday, April 23, 2008
Turning A Financial Corner...
The difference with this credit crisis is that there is no real visibility towards what sort of foundations our major financial institutions are standing on. The way mortgages - prime and subprime - were packaged and sold as slices of other financial instruments means everyone is guessing. Look into your Glass Onion.
One explanation is that we got here because mortgage bankers and brokers were sleazy, investment bankers were greedy for fees, banks were incompetent, rating agencies were compromised, and regulators either were blinded by deregulatory ideology or chose to look the other way. Obviously, there is a good deal of truth in all of that.
- What if, for the better part of a decade, the United States had been living way beyond its means, consuming more than it produced and investing more than it saved? What if China and Taiwan and Saudi Arabia and even Japan were willing to finance that trade deficit on easy terms because it allowed them to peg their currencies to the dollar in a way that generated higher job creation and economic growth in their home markets? And what if this mutually advantageous imbalance in trade and investment flows wound up creating a huge supply of cheap dollar-denominated credit that virtually invited the bankers and brokers and rating agencies and private-equity firms in U.S. markets to throw caution to the wind and make ill-advised lending and investing decisions?
- ...it means that households will have to reduce consumption, increase savings and stop piling up credit card debt or using home equity as an ATM... the federal government stops running huge operating deficits by raising taxes or dramatically cutting national security and entitlement spending...the price of stocks, bonds, commodity futures and derivatives return to levels that reflect real cash flows and risk-adjusted economic values, not speculative values based on continued availability of cheap and easy money.
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